In Ireland, Banking Stress Tests Must Be Seriously Stressful

The stakes could not be much higher as the Irish central bank prepares to publish a new round of stress tests for the broken Irish banks.

Matthew Elderfield, the central bank’s new head of financial regulation, Tuesday explained the background to the tests, which will be published next week.

“These tests take place in the context of a severe crisis in the euro sovereign debt markets, a weaker Irish economy subject to further fiscal consolidation, as part of a formal European Union/International Monetary Fund program for Ireland and against the background of a lack of market confidence in the Irish banking system, reflected in the stressed wholesale funding position of the banks and concerns about future loan losses under adverse scenarios,” he said.

Elderfield’s list of woes facing the Irish banks could hardly be worse.

The regulators and the new coalition government, which took power just two weeks ago, know the tests must be robust and deliver the definitive count on the losses of the Irish banks if Ireland is to have any chance of calming its calamitous banking and government crisis.

The country since last October has been cut off from debt markets and unable to refinance its budget deficits. Its banks depend almost wholly on the European Central Bank and Central Bank of Ireland for their week-by-week funding.

In November it was forced to turn to the European Union and International Monetary Fund for international loans amounting to €67.5 billion to fund its budget spending over the next few years. It then faced an effective ultimatum to sort out its banks.

At the crux of the Irish debt crisis is the question as to whether the Irish government can afford to carry much more of the financial burden. The stress tests may answer that question.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.